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Author: 


Hooper,  George  G. 


Title: 


Leasehold  insurance 


Place: 


[New  York] 


Date: 


[1920] 


MASTER   NEGATIVE  # 


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PRESERVATION  DIVISION 

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ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


816 

H766 


Hooper »  George  G 

Leasehold  insurance:  an  address  delivered 
before  the  one  htihdred  and  fifty- second  meeting  of 
The  insurance  society  of  New  York,  on  Tuesday, 
January  26th,  1920,  by  George  G.  Hooper.  f2d  ed.^ 
jNew  York  3  Hooper  |-19203 

15  p*   23  cm. 

Bibliography,   1  p.  following  p*  15. 


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Columbia  Winititxiitp 


LIBRARY 


School  of  Business 


0\H  «f  th 


A  irtSMWHH 


LEASEHOLD 
INSURANCE 


AN  ADDRESS 

Delivered  before  the  one  hundred 
and  fifty-second  meeting  of 

The   Insurance   Society  of  New   York 
on  Tuesday,  January  26th,  1920 

by 

GEORGE  G.  HOOPER 

SCHOOL  OF  BUSINESS 


DARBY,   HOOPER  &   Mc  DANIEL 


I 

T 
% 

liii 


INTRODUCTION 

IT  IS  a  matter  of  some  regret 
to  me  that  the  topic  for  this 
afternoon  was  not  assigned  to 
some  one  whose  experience  extends 
beyond  the  local  field. 

But,  as  you  all  know,  our  secre- 
tary has  set  us  such  an  example  of 
zeal  and  devotion  to  the  interests 
of  the  Insurance  Society  that  one 
would  feel  ashamed  to  refuse  any 
service  that  he  might  request  and 
I  am  glad  to  make  a  small  partial 
payment  on  account  of  the  debt 
that  I  personally  owe  to  the  Soci- 
ety. 


I 


Leasehold  Insurance 


Gentlemen : 

It  is  as  true  in  the  insurance  business  as  in  any  other  human 
activity  that  knowledge  is  the  result  of  experience.  The  inter- 
pretation of  the  fire  insurance  contract  in  its  application  to  the 
actual  circumstances  of  numberless  claims  has  built  up  a  body  of 
law  and  of  practice  by  which  we  are  guided  in  our  conduct  of  the 
business. 

There  are  probably  few  subjects  of  equal  importance  con- 
nected with  the  business  concerning  which  there  is  less  formal 
information  or  instruction  than  that  of  Leasehold  Insurance.  This 
is  due  in  part  to  the  fact  that  the  serious  losses  have  been  compara- 
tively few  and  litigated  claims  quite  rare. 

For  this  reason  this  paper  is  offered  in  full  appreciation  of 
the  fact  that  it  is  only  an  attempt  to  combine  in  one  more  or  less 
comprehensive  discussion  the  rather  fragmentary  statements  of  a 
few  writers  and  the  views  of  some  of  our  underwriters  and  loss 
adjusters  who  have  been  interested  in  the  subject. 

Many  possible  variations  that  are  not  directly  discussed  will 
occur  to  you,  but  it  is  hoped  that  the  general  principles  will  be 
made  sufficiently  clear  to  point  the  way  to  the  solution  of  each 
particular  problem. 

The  practice  of  insurance  against  loss  by  fire  was  for  many 
years  largely  confined  to  the  protection  of  visible  property,  such  as 
buildings,  household  goods,  merchandise,  machinery,  appliances, 
etc.,  but  with  the  growing  recognition  of  the  advantage  of  insur- 
ance there  has  come  about  an  increasing  demand  on  the  part  of 
the  public  for  protection  against  incidental  losses  resulting  from 


i 


the  destruction  of  the  building,  the  loss  of  anticipated  profits  to 
the  merchant  on  his  stock  of  goods,  the  loss  of  the  opportunity  of 
profitable  production  to  the  manufacturer,  the  loss  of  anticipated 
commissions  to  the  selling  agent  or  factor. 

These  incidental  losses  are  no  less  real  than  the  property 
losses,  but  they  may  be  more  difficult  to  estimate  or  appraise  and 
when  insured  the  contract  will  usually  contain  some  rule  by  which 
the  loss  is  to  be  measured.  Rent  insurance  is  usually  based  on  the 
annual  rent  of  the  building  and  only  a  pro  rata  proportion  is  col- 
lectible for  the  term  between  the  date  of  the  fire  and  the  time 
when  the  building  could  with  ordinary  diligence  be  restored. 
Commission  or  Profit  insurance  usually  fixes  an  agreed  percentage 
to  be  paid  either  on  the  sound  value  of  the  goods  damaged  or  de- 
stroyed or  on  the  amount  of  loss  to  merchandise  as  finally  adjusted. 
Use  and  Occupancy  or  Business  Interruption  insurance  usually 
fixes  a  per  diem  loss  of  i /300th,  or  other  named  fraction  of  the 
total  amount  of  insurance  for  each  day  of  total  interruption  or 
production. 

One  of  the  incidental  losses  which  may  be  and  often  is  sus- 
tained is  the  loss  of  use  by  a  lessee  of  the  premises  leased  to  him, 
insurance  against  which  is  the  subject  of  our  present  consideration. 

A  Lease  is  a  conveyance  of  lands  or  tenements,  usually  in 
consideration  of  rent,  for  life,  for  years  or  at  will,  but  always  for 
a  less  term  than  the  lessor  has  in  the  premises. 

While  a  lease  may  be  for  an  indefinite  term  (for  life  or  at 
will)  we  shall  consider  only  the  lease  for  a  definite  term,  as  it 
would  be  difficult  if  not  impossible  to  determine  the  value  of  a 
lease  in  the  absence  of  a  definite  term. 

When  unimproved  property  or  land  is  leased  and  such  im- 
provements as  may  be  made  are  at  the  cost  of  the  lessee,  the  lease 
is  not  usually  terminated  by  destruction  of,  or  damage  to  the  im- 
provement. In  such  a  case  the  lessee  has  the  right  to  insure  his 
improvement  and  to  replace  it.  He  suffers  also  an  interruption 
of  his  use  exactly  as  the  lessor  or  owner  would  if  he  had  made  the 
improvement  and  can  insure  his  rents  under  the  usual  forms  of 
rent  insurance. 

When  the  leased  premises  consist  of  or  comprise  an  improve- 
ment or  building  or  a  part  of  it,  the  building  remains  the  property 


4 


of  the  owner  or  lessor  and  the  lessee  has  an  insurable  interest  in 
the  value  of  his  lien  for  occupancy,  but  he  has  no  interest  in  the 
building.* 

If  a  lease  of  improved  property  is  not  terminated  by  the  de- 
struction of  the  building  by  fire  or  otherwise  and  the  lessee  is 
required  to  continue  to  pay  rent  without  interruption,  that  loss 
also  is  properly  covered  by  rent  insurance. 

An  insurable  leasehold  interest  exists  whenever  some  addi- 
tional valuable  consideration  has  been  paid  for  its  possession,  over 
and  above  the  considerations  stipulated  in  the  lease,  or  whenever 
any  expenditure  for  improvements  has  been  made  or  whenever 
the  possession  of  a  lease  results  in  a  profit  to  the  lessee,  and  when 
in  either  of  these  cases  (or  in  any  combination  of  them)  the  occur- 
rence of  a  fire  would  terminate  the  lease  and  cause  a  loss  to  the 
lessee  of  the  purchase  price  or  bonus,  or  of  his  investment  in  im- 
provements or  of  his  prospective  profit  or  all  of  them  together. 

It  may  be  well  to  point  out  here  that  the  profit  to  be  derived 
from  conducting  a  business  is  something  separate  and  distinct  from 
the  earning  power  of  the  premises  as  real  estate,  and  that,  properly 
speaking,  leasehold  interest  has  to  do  with  the  earning  power  of 
the  real  estate.  The  conducting  of  any  business  is  not  necessarily 
limited  to  a  specific  location. 

The  profitable  use  of  the  means  of  production  or  service  may 
be  interrupted  or  destroyed,  but  can  be  restored  or  duplicated 
elsewhere  in  time.  "Use  and  Occupancy"  or  "Business  Interrup- 
tion" insurance  covers  such  losses  and  usually  assumes  one  year  as 
the  maximum  time  necessary  for  such  restoration  or  duplication. 
But  when  a  long  term  lease  yielding  an  annual  profit  to  the  lessee 
is  terminated  for  any  cause,  the  lessee's  loss  is  final  and  total. 
The  building  may  be  restored  or  rebuilt  by  the  owner,  but  he  will 
then  rent  the  premises  on  the  basis  of  current  rental  values  and 
himself  enjoy  the  advantages  of  higher  rental,  which  the  lessee 
previously  had. 

A  possible  exception  might  be  made  in  the  case  of  "good 
will"  when  that  depends  on  the  location  of  the  business  rather 
than  on  the  name  or  reputation  of  the  lessee  or  on  the  character 
of  the  article  he  sells.    If  the  location  is  peculiarly  adapted  to  the 

•Griswold,  Fire  Underwriters'  Text  Book,  689. 


} 


business  and  no  other  location  can  be  secured,  the  good  will  of  the 
business  will  be  lost  by  the  cancellation  of  the  lease. 

The  value  of  the  good  will  is  difficult  to  determine,  is  largely 
involved  with  the  activity  of  the  individual  and  is  possibly  subject 
to  exaggeration.  To  the  extent  that  it  can  be  defined  it  may 
properly  be  insurable,  but  should  be  written  with  caution.* 

It  would  seem  to  be  a  reasonable  assumption  that,  at  the  time 
of  the  signing  of  a  lease,  the  amount  of  rent  or  other  consideration 
paid  is  the  full  rental  value  and  that  there  can  be  no  definite  or 
insurable  profit  to  be  gained  by  the  lessee  from  the  possession  of 
the  lease  as  such,  but  it  is  even  then  quite  possible  that  the  lessee 
may  have  secured  the  premises  for  less  than  actual  value,  through 
the  ignorance  of  the  lessor,  or  owing  to  his  pressing  necessities  or 
for  other  reasons.  In  such  cases  there  may  be  an  actual  pros- 
pective profit  from  the  beginning. 

The  true  measure  of  the  value  of  the  leasehold  is  the  differ- 
ence between  the  consideration  paid  for  the  premises  and  the  actual 
net  rental  value  to  the  lessee.  The  consideration  paid  may  be  an 
agreed  rent  of  so  much,  monthly,  quarterly  or  annually ;  or  there 
may  be  in  addition  to  the  fixed  rent,  an  obligation  to  pay  taxes, 
interest,  water  rent  and  other  maintenance  charges,  and  possibly 
an  agreement  to  improve  the  property  in  some  specified  way  or  by 
the  expenditure  of  a  specified  amount — all  of  these  items  taken 
together  make  up  the  sum  of  the  rent  paid. 

The  rental  value  to  the  lessee,  if  he  occupies  the  premises 
himself,  is  the  amount  for  which  the  premises  could  be  sublet,  or 
the  amount  which  he  would  be  obliged  to  pay  for  the  same  space 
in  an  equally  good  neighborhood  and  under  equally  desirable  con- 
ditions. If  the  premises  are  rented  to  sub-tenants,  then  the  amount 
of  rent  actually  received  would  establish  the  rental  value  of  the 
premises,  or,  if  a  portion  is  occupied  by  the  lessee  and  the  rest  sub- 
let, then  the  rental  value  of  his  own  space  should  be  added  to  the 
rent  received  from  his  sub-tenants. 

There  is  usually  a  fairly  well-established  standard  of  rental 
values  and  any  qualified  real  estate  agent  or  operator  will  be  able, 
from  his  general  knowledge  of  conditions,  to  estimate  the  value 
in  any  given  case  and  furnish  a  check  on  the  lessee's  estimate  where 
any  part  of  the  premises  is  occupied  by  the  lessee. 


'Eastern   Underwriter,  9-29-16. 


8 


From  this  rental  value  when  ascertained  there  should  be  de-  i 
ducted  such  maintenance  charges,  other  than  those  required  by  } 
the  lease,  as  would  be  suspended  or  terminated  by  the  untenantable  ] 
condition  of  the  premises. 

Having  established  the  net  annual  rental  value  of  the  prem- 
ises, there  should  be  deducted  the  amount  of  annual  rent  in  what- 
ever form  it  may  be  paid  by  the  lessee  and  the  remainder  is  the 
lessee's  annual  profit,  or  in  other  words,  the  annual  value  of  his 
leasehold  interest.  If  the  lease  has  more  than  one  year  to  run, 
the  annual  profit  should  be  multiplied  by  the  number  of  years  in 
the  unexpired  term  of  the  lease  to  arrive  at  the  total  value  of  the 
leasehold.  If  the  lease  gives  the  lessee  the  option  of  a  renewal  for 
a  further  term  or  terms,  then  the  annual  profit  may  be  multiplied 
by  the  full  number  of  years  to  the  end  of  the  extended  term.  If 
the  renewal  privilege  can  be  exercised  only  by  the  payment  of  an 
increased  rent,  the  calculation  must  be  made  for  the  renewal  term 
on  the  basis  of  that  increased  rent.* 

All  of  this  is  equally  true  whether  the  leased  premises  consist 
of  an  entire  building  or  only  a  part  of  it,  and  applies  not  only  to 
the  original  lessee,  renting  from  the  owner,  but  also  to  each  of 
the  persons  to  whom  he  may  sublet  all  or  a  part  of  the  premises 
leased  by  him,  and  in  turn  to  their  sub-tenants,  so  that  an  insur- 
able leasehold  interest  may  be  possessed  at  the  same  time  by  a  series 
of  tenants  and  sub-tenants. 

Cases  like  the  following  are  of  actual  occurrence : 
"A"  rents  a  certain  building  for  $5,000  a  year  for  twenty 
years:  at  the  end  of  the  first  year  "A"  sublets  to  "B" 
for  $6,000  a  year  for  the  remainder  of  the  term  (19 
years  at  $1,000.)     "AV*  prospective  profit $19,000 

Four  years  later  "B"  sublets  to  "C"  for  $8,000  (15  years 

at  $2,000) .    "B's"  prospective  profit 30,000 

Five  years  later  "C"  sublets  to  "D"  for  $10,000  ( 10  years 

at  $2,000).    "C's"  prospective  profit 20,000 

Each  of  these  lessees— "A,"  "B"  and  "C"— has  an  insurable 

interest  in  the  lease  he  holds  for  the  amount  indicated. 

Such  value  as  the  leasehold  has  may  have  been  created  in  one 
or  more  of  the  following  ways : 

•Griswold,  Fire  Underwriters'  Text  Book,  275. 


iH 


2. 


I.  The  lessee  may  have  improved  the  building  in  appearance,  in 
convenience  or  in  size  by  the  expenditure  of  money  or  labor. 
He  may  charge  up  the  outlay  as  a  part  of  his  rent,  writing  ofE 
a  ratable  proportion  each  month  during  the  term  of  his  lease, 
or  he  may  insure  his  interest  in  such  improvements  separately. 
Sometimes  a  wise  expenditure  for  improvements  will  add  to 
the  rental  value  out  of  all  proportion  to  the  amount  so  spent. 
It  frequently  happens  that  the  owner  is  without  the  resources 
to  make  such  improvements  himself  or  lacks  the  imagination 
to  devise  or  the  confidence  or  initiative  to  make  a  profitable 
improvement.  Or  the  property  may  be  an  estate  which  for 
various  reasons  is  so  involved  or  tied  up  that  no  expenditures 
can  be  made  on  improvements. 

Successful  real  estate  operators  recognize  opportunities 
which  are  overlooked  by  others,  and  having  the  courage  of  theii 
convictions,  they  have  the  spirit  and  energy  to  carry  their  plans 
to  a  successful  realization. 

The  character  of  the  neighborhood  may  have  improved  by  the 
erection  of  new  buildings,  attracting  a  higher  class  of  tenant$ 
or  changing  the  course  of  traffic.  (The  erection  of  the  Penn- 
sylvania  Railroad  Station  at  Seventh  Avenue  and  32nd  Street 
in  this  City  does  both  and  will  gradually  revolutionize  that  sec- 
tion. Real  estate  values  increased  instantly  and  largely  from 
the  moment  the  project  became  known.  The  most  conspicuous 
result  up  to  the  present  time  is  the  Pennsylvania  Hotel.) 

By  the  shifting  of  a  business  centre.  Merchants  in  a  given 
line  of  trade  as  shoes,  woolens,  crockery,  hardware,  leather, 
tend  to  keep  together,  and  when  one  or  two  leaders  move  to 
an  entirely  new  locality,  attracted  by  larger  space  and  lower 
rent,  the  others  are  likely  to  follow.  (The  Fifth  Avenue 
shopping  district  in  New  York  is  a  good  illustration  of  this; 
also  the  wholesale  silk  business,  relocated  in  the  neighborhood 
of  Fourth  Avenue  and  23rd  Street.) 

4.  New  or  improved  transportation  facilities  lik«  the  construction 
or  extension  of  surface,  elevated  or  subway  car  lines  increase 
the  rental  value  of  all  property  affected. 

5.  An  increased  population,  attracted  by  some  new  and  large  in- 
dustry, creates  greater  housing  and  trading  demands. 


10 


3. 


• 


6.  The  natural  growth  of  the  population,  which  is  one  inevitable 
factor  that  must  be  taken  into  account  in  every  large  city. 

7.  An  increased  cost  of  building  materials  or  labor,  or  both,  im- 
mediately enhances  the  value  of  all  existing  structures.  At 
the  present  time  this  condition  affects,  in  some  degree,  all  rental 
values,  and  probably  every  lessee  in  all  the  large  centres, 
whose  lease  was  made  a  year  or  more  ago,  could  demonstrate 
an  insurable  leasehold  interest.  If  he  occupies  the  leased  prem- 
ises himself,  he  knows  he  cannot  secure  equivalent  accommoda- 
tions except  for  a  substantial  increase  over  the  amount  he  now 
pays.  If  he  sublets,  he  has  already  raised  his  rents  or  will  do 
so  as  soon  as  the  leases  fall  in. 

Having  considered  the  various  ways  in  which  a  leasehold 
interest  may  be  acquired  or  augmented,  we  will  now  see  whether 
that  interest  may  become  impaired,  and  how. 

All  of  the  conditions  which  have  been  discussed,  as  adding 
value  to  a  leasehold,  may  be  reversed.  The  building  may  de- 
teriorate from  the  lack  of  necessary  repairs;  the  erection  of  ad- 
joining buildings  may  shut  off  light  or  air  or  bring  undesirable 
tenants  or  processes;  a  trade  centre  may  move  away;  transporta- 
tion facilities  may  be  reduced  or  discontinued;  population  may  be 
attracted  to  other  more  desirable  localities;  reduced  labor  and 
material  costs  may  result  in  the  erection  of  newer  and  better 
buildings  which  can  be  profitably  rented  at  a  lower  range  of  rents. 
All  of  these  conditions  have  been  experienced  at  various  times  and 
in  various  places,  and  the  lessee  can  only  feel  assured  of  his  pros- 
pective profit  for  the  period  for  which  he  has  actually  sublet  at  a 
profit,  and  even  then  the  insolvency  of  his  tenants  may  oblige  him 
to  secure  others  on  a  less  profitable  basis,  or  possibly  on  terms  that 
involve  him  in  an  actual  loss.  There  is  a  speculative  factor  in  all 
such  transactions  that  must  not  be  disregarded  or  disappointment 
or  even  disaster  may  follow. 

The  terms  of  the  contract  itself  as  it  bears  on  the  security  of 
the  lessee  in  the  enjoyment  of  his  lease  must  also  be  considered. 

The  lessee  undertakes  to  do  certain  things  and  to  refrain  from 
doing  other  things,  and  a  default  on  his  part  may  enable  the  lessor 
to  terminate  the  lease  in  accordance  with  its  conditions. 

Fire,  flood,  earthquake,  war  or  insurrection  may  result  in  the 
destruction  of  the  building  or  render  it  untenantable — and  every 


11 


it 


if 


properly  drawn  lease  provides  what  eflFect  such  occurrences  shall 
have  on  the  contract,  and  in  the  absence  of  some  provision,  the  law 
of  the  land,  either  the  common  law  or  some  statutory  provision, 
will  determine. 

At  common  law  and  in  any  State  in  which  the  common 
rule  has  not  been  changed  by  statute,  a  lessee  must  pay  rent  during 
the  term  whether  the  building  is  destroyed  or  not,  unless  some 
clause  in  the  lease  expressly  provides  to  the  contrary.* 

Under  this  rule  (the  common  law)  the  land  was  consid- 
ered the  most  important  part  of  the  leased  premises  and  the  lessee 
was  bound  to  go  on  paying  rent  even  after  destruction  of  the 
building.** 

The  New  York  Statute  is  as  follows:  "When  any  building 
which  is  leased  or  occupied  is  destroyed  or  so  injured  by  the  ele- 
ments, or  any  other  cause,  as  to  be  untenantable  and  unfit  for 
occupancy,  and  no  express  agreement  to  the  contrary  has  been 
made  in  writing,  the  lessee  or  occupant  may,  if  the  destruction  of 
injury  occurred  without  his  fault  or  neglect,  quit  and  surrender 
possession  of  the  leasehold  premises,  and  of  the  land  so  leased  or 
occupied ;  and  he  is  not  liable  to  pay  the  lessor  or  owner  rent  for 
the  time  subsequent  to  the  surrender." 

The  New  Jersey  Statute  is  as  follows:  "Whenever  any 
building  or  buildings  erected  on  leased  land  shall  be  injured  by 
fire  without  the  fault  of  the  lessee,  the  landlord  shall  repair  the 
same  as  speedily  as  possible,  or  in  default  thereof,  the  rent  shall 
cease  until  such  time  as  such  building  or  buildings  shall  be  put  in 
complete  repair;  and  in  case  of  the  total  destruction  of  such  build- 
ing or  buildings  by  fire  or  otherwise,  the  rent  shall  be  paid  up  to 
the  time  of  such  destruction,  and  then,  and  from  thenceforth,  the 
lease  shall  cease  and  come  to  an  end;  provided  always  that  this 
section  shall  not  extend  to  or  apply  to  cases  where  the  parties  have 
otherwise  stipulated  in  their  agreement  of  lease." 

The  clause  in  a  lease  which  defines  the  status  of  the  contract 
in  the  event  of  fire  is  commonly  called  the  Fire  Clause  and  in  the 
most  frequent  form  will  read  about  as  follows:  "In  case  the 
building  erected  upon  said  premises  shall  be  partially  damaged  by 
fire,  the  same  shall  be  repaired  as  speedily  as  possible  at  the  ex- 


*N.  Y.  Journal  of  Commerce,  8-10-06. 
••N.  Y.  Journal  of  Commerce,  10-13-10. 


pense  of  the  landlord,  and  in  case  said  damage  shall  be  so  exten- 
sive as  to  render  the  building  untenantable,  the  rent  shall  cease 
until  such  time  as  the  building  shall  be  put  in  repair,  but  in  case 
of  the  total  destruction  of  the  building  upon  said  premises  by  fire 
or  otherwise,  the  rent  shall  be  paid  up  to  the  time  of  such  de- 
struction, and  then  and  thenceforth  this  agreement  shall  termi- 
nate, provided,  however,  that  such  damage  or  destruction  be  not 
caused  by  the  negligence  of  Tenant." 

There  are  many  variations  from  this  form,  of  which  a  few 
examples  are  given :  "If  fire  shall  occur  in  the  premises,  the  land- 
lord shall  have  the  option  of  terminating  the  lease."  "If  the 
building  shall  be  damaged  to  the  extent  of  25%  (or  other  fixed 
percentage),  the  lease  may  be  terminated  at  the  option  of  the  land- 
lord." "If  the  premises  shall  be  rendered  untenantable,  the  lease 
shall  terminate."  "If  the  building  shall  be  so  damaged  that  the 
landlord  shall  decide  not  to  repair."  "If  the  building  shall  be  so 
damaged  that  the  landlord  shall  decide  to  rebuild."  Each  of 
these  provisions  creates  the  possibility  of  a  termination  of  the  lease. 
Some  specified  extent  of  damage  or  destruction  either  terminates 
the  lease  or  gives  the  lessor  or  the  lessee  the  option  of  doing  so. 

Too  much  confidence  (nust  not  be  placed  in  the  words  "totally 
destroyed."  The  courts  have  held  that  total  destruction,  within 
the  meaning  of  the  contract,  is  accomplished  when  the  damage  is 
so  extensive  as  to  necessitate  substantially  the  rebuilding  of  the 
premises. 

Whenever  the  lessor  has  an  option  to  exercise,  it  may  be 
confidently  assumed  that  in  proportion  as  the  lease  is  valuable  to 
the  lessee,  the  lessor  will  be  anxious  to  break  it,  and  when  the 
language  is  loose  or  indefinite,  the  lessor  will  endeavor  to  secure 
an  interpretation  of  the  clause  that  will  be  most  advantageous  to 
him.  The  present  condition  of  high  rental  values  due  to  the 
shortage  of  buildings  is  certain  to  result  in  efforts  to  cancel  leases 
that  in  normal  times  would  not  be  disturbed. 

We  have  seen  that  a  lease  may  acquire  a  value  in  excess  of 
the  amount  of  rent  paid,  that  such  value  over  a  period  of  years  in 
a  long  term  lease  may  amount  to  a  considerable  sum,  that  the 
occurrence  of  a  fire  may  terminate  the  lease  and  thereby  cause  an 
actual  loss  to  the  lessee  of  his  prospective  profit,  and  that  profit 
becomes  a  proper  subject  of  fire  insurance. 


13 


tid 


i 
11 


The  examination  of  a  considerable  number  of  leases  justifies 
the  belief  that  possible  future  value  is  rarely  given  any  considerar 
tion  virhatever  at  the  time  the  lease  is  prepared,  due  no  doubt,  to 
the  fact  that  most  leases  are  made  only  for  occupancy,  and  very 
iew  with  a  definite  view  to  profit  for  the  lessee,  and  in  those  cases 
the  lessee  may  fear  to  disclose  his  expectations  until  the  lease  has 
been  secured. 

As  a  result,  the  only  protection  for  the  owner  of  a  valuable 
leasehold  in  the  event  of  fire  is  to  carry  adequate  insurance. 

As  fire  insurance  underwriters,  we  are  interested  in  develop- 
ing a  demand  for  this  additional  class  of  business.  The  creation 
of  a  demand  for  such  forms  of  insurance  as  Rent,  Use  and  Occu- 
pancy, Profit  and  Commission  and  Leasehold  is  as  effective  from  an 
income  producing  standpoint  as  the  building  of  new  cities  or  even 
the  development  of  new  states.  But  we  are  not  only  interested  in 
producing  income,  but  of  earning  a  profit  on  the  business  written, 
and  it  is  therefore  of  importance  that  we  should  understand  as 
clearly  as  possible  what  risk  is  undertaken  so  that  we  may  judge 
whether  it  is  desirable. 

The  extent  to  which  the  lessee  can  suffer  by  fire  can  only  be 
decided  when  the  conditions  are  known,  and  they  are  as  various 
as  the  needs  and  desires  of  the  two  parties  to  the  contract  may 
require. 

As  far  as  possible  all  the  facts  should  be  known  and  certain 
of  them  should  be  incorporated  in  the  policy.  The  application 
should  recite  the  unexpired  term  of  the  lease  and  the  monthly 
value  of  the  leasehold  over  and  above  the  rent  paid,  and  insurance 
should  be  carried  for  an  amount  equal  to  the  monthly  value  multi- 
plied by  the  number  of  months  in  the  unexpired  term  of  the  lease. 
The  method  of  arriving  at  this  value  should  be  known,  and  if  it 
is  an  estimated  value,  it  should  commend  itself  to  your  judgment 
as  fair  and  reasonable. 

The  conditions  under  which  the  lease  can  be  terminated  in 
consequence  of  fire  should  be  stated,  and  preferably  the  "fire 
clause"  of  the  lease  should  be  quoted  in  full  and  made  a  part  of 
the  contract. 

The  loss  should  be  limited  to  the  value  for  the  unexpired 
term  from  the  date  of  the  fire,  so  that  the  amount  collectible  is 
reduced  ratably  each  month  during  the  continuance  of  the  policy. 


14 


It  is  usual  to  provide,  in  the  event  of  a  fire  rendering  the 
premises  untenantable  but  not  terminating  the  lease,  that  the 
Company  shall  pay  an  amount  equal  to  the  monthly  value  stated 
during  the  time  the  premises  are  untenantable. 

With  this  information  and  under  these  conditions,  we  must 
consider  the  probability  of  loss  as  we  would  the  hazard  of  any 
undertaking,  considering  the  construction  of  the  building,  its  pro- 
tective equipment,  such  as  automatic  sprinklers,  the  general  fire 
hazard  and  what  the  probabilities  are  that  a  fire  would  damage 
the  building  enough  to  terminate  the  lease  in  accordance  with  its 
conditions. 

When  the  premises,  the  subject  of  the  lease,  is  a  single  floor, 
or  loft,  it  may  more  easily  be  destroyed  within  the  meaning  of  the 
contract  and  the  risk  is  relatively  less  desirable. 

If  any  damage  short  of  total  destruction  is  specified,  the  risk 
is  greater,  as  the  required  extent  of  damage  decreases. 

Any  lease  giving  the  lessor  the  option  of  cancellation  in  con- 
sequence of  a  moderate  damage  is  a  very  hazardous  subject  of 
insurance. 

This  entire  subject  is  of  great  interest  and  of  almost  infinite 
variety  and  will  well  repay  your  further  thought  and  study. 


15 


BIBLIOGRAPHY 


Leasehold  Insurance 


"An  Attorney 


Leasehold  Insurance  Interest.  (Pro- 
ceedings Fire  Underwriters*  Association 
of  Pacific,  1908.) 


Eastern  Underwriter         September  29,  1916;  p.  16. 


Griswoldj  Jeremiah  T. 


Hoey,  James  J. 


Levy,  Leo, 


Medlicott,  William  B. 


Moore,  Francis  C, 


fVilliams,   T,  H. 


Fire  Underwriters'  Text-book:  pages 
275  and  689. 

Letter,  January  20,  1920. 

Use  and  Occupancy,  profits  and  com- 
missions, rents  and  leasehold  insurance. 
(Address  before  The  Insurance  Society 
of  New  York,  January,  191 7.) 

Lectures  on  Fire  Insurance,  Insurance 
Library  Association,  p.  306:  31 1-3 12. 

Fire  Insurance  and  How  to  Build,  p. 
294:  587. 

Insurable  Interest.  (Proceedings  Fire 
Underwriters*  Association  of  Pacific, 
1911.) 


(SECOND  EDITION,  PRINTED  NOVEMBER,  1920) 


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